Good day and welcome to Hope Bancorp’s 2020 First Quarter Earnings conference call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Angie Yang, Director of Investor Relations. Please go ahead.

Thank you, Brandon. Good morning everyone and thank you for joining us for the Hope Bancorp 2020 first quarter investor conference call. As usual, we will begin - we will be using a slide presentation to accompany our discussion this morning. If you have not done so already, please visit the Presentations page of our Investor Relations website to download a copy of the presentation or if you are listening into the webcast, you should be able to view the slides from your computer screen as we progress through the presentation. Beginning on Slide 2, I’d like to begin with a brief statement regarding forward-looking remarks. The call today may contain forward-looking projections regarding the future financial performance of the company and future events. These statements are based on current expectations, estimates, forecasts, projections and management assumptions about the future performance of the company, including any impact as a result of the COVID-19 pandemic, as well as the businesses and markets in which the company does, and is expected to operate. These statements constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance. Actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. We refer you to the documents the company files periodically with the SEC, as well as the Safe Harbor statements in our press release issued yesterday. Hope Bancorp assumes no obligation to revise any forward-looking projections that may be made on today’s call. The company cautions that the complete financial results to be included in the quarterly report on Form 10-Q for the quarter ended March 31, 2020, could differ materially from the financial results being reported today. In addition, some of the information referenced on this call today are non-GAAP financial measures. Please refer to our 2020 first quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures. Now, we have allotted 1 hour for this call. Presenting from the management side today will be Kevin Kim, Hope Bancorp’s Chairman, President and CEO and Alex Ko, our Executive Vice President and Chief Financial Officer. Chief Credit Officer, Peter Koh is also here with us today and will be available for the Q&A session. With that let me turn the call over to Kevin Kim. Kevin?

Thank you, Angie. Good morning everyone and thank you for joining us today. Given the extraordinary changes in the operating environment brought on by the COVID-19 pandemic, we will spend most of the time on our call today providing an overview of our response, discussing the impact we are seeing on our clients and providing some additional disclosures with respect to our loan portfolio. Let’s begin with Slide 3 with a brief overview of our financial results. Overall, our 2020 first quarter results reflect a solid quarter of financial performance marked by continued progress with strategic initiatives designed to strengthen our organization from an operating, as well as, from an enterprise risk management perspective. Despite the challenging conditions that have developed in recent months, we recognized positive trends in most areas, which resulted in our pre-tax pre-provision income increasing 8% over the preceding fourth quarter of 2019. We generated a higher level of both, net interest income and non-interest income, while keeping our expense levels well controlled, despite the seasonal factors that contribute to the higher salaries and benefits expense that typically occur during the first quarter of each year. We continue to drive down our cost of deposits, which contributed to an increase in our net interest margin, both on a reported basis, as well as on a core basis without the impact of acquisition accounting adjustments. We executed well on our core deposit gathering initiatives. Total deposits increased at an annualized rate of 10% and all of our deposit growth came in our lower costing categories. For the first quarter of 2020, we generated net income of $26 million or $0.21 per share on a fully diluted basis. This reflects an elevated level of provision for credit loss resulting from a combination of, one, our implementation of the…

Thank you, Kevin. Moving on to Slide 10. As Kevin mentioned earlier, we adopted the new CECL accounting standard as of January 1, 2020. As of December 31, 2019, our allowance for loan losses was $94 million. Upon the adoption of the CECL, we recognized a day one adjustment to our allowance for credit losses or ACL of $26.2 million. During the quarter, we updated our macroeconomic variables based on Moody’s Baseline Version 2 scenario published on March 27, 2020. The updated scenarios combined with loan portfolio changes and net charge-offs resulted in an additional net ACL of $24.6 million to a total ACL of $145 million as of March 31, 2020. In terms of the assumptions included in the Baseline Version 2 scenario, we have summarized them in the upper right corner of Slide 10 and they include, among others, a sudden sharp economic downturn due to the pandemic causing, among other indicators, a turmoil in the equity markets and a global oil price wall. Unemployment is forecasted to increase sharply in the second quarter to an average 8.7%. Overall, an economic recovery under the Baseline Version 2 scenario is expected to take longer than originally anticipated. As you can see in the bottom right chart of Slide 10 that we have meaningfully increased our allowance for credit losses as a result of CECL implementations and to account for the current economic environment. Our ACL increased from 77 basis point of loss receivables at December 31, 2019 to 115 basis points as of March 31, 2020. If we move to Slide 11, we have provided some additional details as to the allocation of our allowance for credit losses, as well as the coverage ratios by product category. The coverage ratio for our commercial real estate portfolio increased from 62…

Thank you, Alex. Let’s move on to Slide 18. It goes without saying that the uncertainty around the severity and duration of the crisis makes forecasting beyond the current quarter extremely difficult. So for the time being, we are just going to provide near term expectations for the metrics that we have visibility on, as Alex has provided for non-interest expense and deposit costs. In terms of our capital management, our priorities for the foreseeable future are maintaining sufficient capital to support our customers and communities, as well as continuing to pay our quarterly dividend. Our quarterly dividend is a relatively small claim on our capital and we believe that we can maintain it even with somewhat lower profitability resulting from the impact of the COVID-19 crisis. However, given the high level of uncertainty associated with the economic environment, we intend to thoroughly evaluate our dividend policy each quarter and make decisions prudently based on the performance of the company and the prevailing trends of the economy. This is certainly an extremely challenging time, but it is also a time for Bank of Hope to demonstrate that we can be a source of strength for our customers, employees and communities. We believe we are well prepared to weather this storm and further strengthen our positioning as a bedrock of support for the Korean-American and other communities across the country that we serve. Now, we would be happy to take your questions and add any additional color as requested. Operator, please open up the call.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Chris McGratty with KBW. Please go ahead.

Great. Good afternoon and thanks for the question. Kevin or Alex, the disclosures are very helpful. I’m looking at Slide 9, which gives us the SBA portion of C&I. Could you provide the total SBA loans that are on - the 7(a) loans that are on the balance sheet? Obviously, not the PPP, but the total SBA exposure that’s there a bit.

Are you looking for - this is Peter, are you looking for the SBA 7(a) balances outside of the PPPs?

Exactly, yeah.

Let us see if we have that number off hand here, $491 million.

$491 million. I’m interested maybe in some comments, given the strategy shift that you guys implemented a couple of years ago, whether you’re at all considering shifting back to originating and sell model or ex-selling [ph] some of the existing book given the dynamics of the market.

Well, that will depend upon the situation in the secondary market. And what I understand - and I don’t know if I’m fully updated, the secondary market was kind of inactive with the pandemic declarations and assuming that there will be a time for the secondary market to be fully active as before, at that time, we may consider selling them.

Okay, great. In terms of the comments, Kevin, on the dividend, understand that it’s - the environment’s moving pretty quickly and it’s a quarterly discussion with the Board. What would it take for you guys to address the dividend or to think more seriously about sustainability? Is it things getting worse from here? Is it just a matter of time to things get better? I’m interested in your thoughts of how you’re evaluating the dividend and the payout.

Well, as I mentioned, the capital management is certainly a very high priority for us at this time. While it is our hope to keep the quarterly dividend at the current level, we really have to look into a lot of factors. And I think at this particular time, the movement of the macro economy is the main driving force. With the deterioration of the economy, I think, we will - our profitability will suffer and if that period is prolonged, then we really have to reconsider our dividend because when the profits do not support the current level of our dividends, then we should really think about our capital management and capital position. And our primary focus is to maintain a good capital level so that we can fund the needs of our customers and fund the growth of the bank and for the safety of the bank. But at this time, we don’t see any particular factor based upon which we should conclude that the dividend should be cut down or it should be stopped.

Okay. And if I could just follow up, is there a certain payout ratio that would be kind of evaluated in that situation? Obviously earnings are kind of all over the place for the banks, given CECL, but kind of long term payout ratio that you’d be kind of thinking about.

Yeah, Chris, the payout ratio for this particular situation is kind of meaningless in my personal view. But, now, let’s say 40% of our payout ratio that we have been -- that is in the ranges that we have seen with our peers as well, but that obviously depends on our earnings. But as Kevin mentioned, our top priority is to preserve the best uses of our capital. So we don’t have certain quantitative threshold 40%, 50%, whatever the payout ratio at this time.

Great. And since I have you, could you help, Alex, with the kind of a tax rate going forward? Thanks.

Sure. The tax rate, we reported this time slightly below 20%. Reason for that is our estimated total annualized 2020 income is much lower compared to what we budgeted for in December last year. So I think it will be slightly below 20% for the rest of the year.

Great. Thank you very much.

Thank you, Chris.

Our next question comes from Matthew Clark with Piper Jaffray. Please go ahead.

Hey, good morning.

Good morning, Matt.

Do you have any sense for where your C&I line utilization stood at the end of April here relative to 3/31?

End of April, I think we were fairly flat I think with the quarter-end or so. I think we were slightly down a little bit, but about 60% I think is right, right number.

Okay. And on the commercial loan modifications, the 2%, is that of the -- 2% of the commercial portfolio or is that 2% of the total loan portfolio?

Actually, they’re both around 2% right now, both the commercial as well as the total here. And we will note that we’re still early in the process of boarding those modifications. So we do anticipate that number to increase steadily here over the course of the second quarter.

Okay. And on the coverage ratio, the 92 basis points on the hotel-motel segment, the ACL, I guess how do you think about that? How does that coverage ratio compare to the Great Recession for legacy Hope? I know it’s obviously a very different cycle this time around, but I just wanted to get any sense for the coverage ratio as you kind of migrated through the Great Recession and the ultimate losses there.

It is a different set of circumstances and environment. So I think it is a little bit tough to compare. I think the loss ratios were a little higher during the Great Recession. I think couple of components I’m looking at here, I think in terms of this time around in the downturn, I think we have a lot of support right now with the government through the CARES Act as well as the inter-agency guidance’s in terms of our modifications. I think and the nature of these modifications that will give us some flexibility to be a little bit longer term in terms of modifications, I think will ultimately lead to better results in terms of actual losses. So there’s a lot of different factors to weigh in there, but we are monitoring very closely and you have seen the CECL number jump up considerably in the first quarter based on the scenarios that are continuing to decline.

Okay. And then just on the margin in the deposit costs, based on total deposit costs drifting below 100 basis points here in the second quarter would suggest that your interest bearing deposit costs are going to come down by about 50 basis points. And I don’t get the sense that your asset yields are going to come down by as much. So just wondering, are you - when you talk about the margin coming down here in the 2Q, is that the reported margin or is that also the core? I’m just having a tough time getting the core to go down on a linked quarter basis.

Yeah, the core basis, we have increased that 8 basis point for this quarter, but the reported basis was much higher. So I would say, Q1 was kind of unusual. We have a $5.6 million of recovery on the previously acquired loan. I don’t think we will have such a big accounting adjustment going forward. And as I indicated in my prepared remark on margin guidance’s, it’s very tough for us to give you an accurate margin guidance’s, but we gave a directional guidance’s, that 150 basis point recently cut in March. It definitely have our impact to our net interest margin on a negatively, because we have -- even though we have above 59% of the loans are fixed, but 39% of the variable-rate loans, it will be repriced at a much lower rate. And not all, because only portion of that is tied to prime rate. But we are also very aggressive as we delivered in the Q1 in terms of deposit repricing. Especially we were encouraged to see -- in the late March and April, we did see substantial rate reduction on the Money Market and the new CD. In fact, we did see increase of the Money Market. So I would expect to continue to see debt reduction on the deposit rate going forward and hopefully that have a offset of the pressure on net interest margin. That’s a kind of a general guidance’s that I feel comfortable to discuss. But further detail, yet to be seen.

Sounds good. Thank you.

[Operator Instructions] Our next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Hi, good morning, everyone. This is Jake Stern on for Gary. How’s it going?

Hi, Jake.

Hi. So just first question, it looks like the slide deck only provides LTVs and DCRs for loans originated since 2019. Is it possible you could tell me what the metrics for your total CRE portfolio are?

So, we actually limited that slide to the originations since 2019 because we wanted to give an accurate presentation portrayal of the appraisal values. We have data for the older originated loans, but some of those appraisals are not up to date. So we could follow-up with you if you’d like to get a little bit more clarity there. But I think the 2019 with -- the way we interpret this is over the last many years, five years, say, the market appreciation really has been pretty substantial in some of these buckets, particularly hotel-motel and so as we look at the older valuations, we’ll see actually - assuming we’ll see lower LTVs come through as we look at that larger population of data. So, we wanted to position the slide here so that we have a little bit better, more recent information for you.

Great. Appreciate the color. And how much of the hotel-motel portfolio is SBA guaranteed?

We’re under 9%. Under 9% for that mark.

Okay, I appreciate that. Just one more from me and then I’ll hop off. Could you tell me the remaining acquisition fair value market March 31?

I think we have still like $7.5 million level left for FAS 91 and for PCD we have about $29 million left. So the combined it’s around $30 million - I’m sorry, $37 million.

Okay. Wonderful. Thank you for taking my questions.

Thank you.

Our next question comes from David Chiaverini with Wedbush Securities. Please go ahead.

Hi, thanks. Couple of follow-up questions on the hotel-motel portfolio. What was the loss rate on this portfolio during the financial crisis?

Sorry, could you repeat your question? I think you were cutting off for a second there.

Sure. So on the hotel-motel portfolio, what was the loss rate that you experienced on this portfolio during the financial crisis?

David, that’s a hard question to respond to because during the financial crisis, we were not Bank of Hope, we were Center Nara and Wilshire. So we’d have to go back and look at all three of those organizations. But we’ll follow up back with you after the call.

Yeah. We can definitely do that.

Got it, okay. That was actually the only question that I had. Thank you.

Okay.

Our next question comes from Steve Marascia with Capitol Securities Management. Please go ahead.

Good morning, everyone. First off, I want to thank you for the clarity and color you kind of gave us about everything that’s going on with the bank, really appreciate that. Two more broad questions for you guys to answer. Given, I know you can’t give much guidance outside of this current quarter, but what are your economic assumptions for the back-end or the U.S. economy going forward into the second half this year? You guys are going to have a gradual recovery, a quick recovery or longer recovery? And my second question is in terms of -- I don’t know if you gave this number out but in terms of your total loan portfolio, and given that various States are in heavier lockdowns than others, can you give a percentage of what part of your bond portfolio is allocated to California, Washington, Oregon, New York and Illinois?

Okay. Let me start with the economic forecast that we used. We actually used two kind of economic forecast, one for CECL which is Moody’s Baseline Version 2, which includes recent pandemic economic situations, which, for example, like a GDP forecast to decline annualized 2.5% in Q1 and also big drop in Q2, 18.3% and then it will kind of rebound or recover. But that’s kind of a slower pace than the V-shape. And another kind of baseline or the assumption that we used was for CCAR severely adverse cases for our capital stress testing purposes. So we used both Moody’s Baseline as well as CCAR severely adverse cases for different purposes, CECL and capital. And the CCAR severely adverse cases has a little bit more aggressive than the Baseline V2 in terms of recovery speed. I think you’re asking how soon we can recover from this pandemic situation. Again the CCAR severely adverse takes a longer time to recover. So overall, it was a little bit more adverse cases or assumption than the Moody’s Baseline Version 2 that we used. But one thing that I want to be clear if Moody’s is still issuing their new scenarios, especially in April, we did see substantial changes. So as we move forward for those economic forecast changes, we will reflect that in our capital stressing purposes, as well as our CECL, adequate ACL perspective, that’s the part that I’m not 100% sure, which is correct, but we will monitor very carefully.

Okay. And any - can you quantify how much of your - what part of your loan portfolio is split between - is in California, Washington, Oregon, New York and Illinois? Or is that not at hand and can you get that to me later or so?

I think we have a geographical distribution on the CRE portfolio. But if you want all the entire, I think we can do that.

Sure.

I think we have on Slide 7, we have for CRE portfolio distribution in California is at 68% and New York is 11%, the second highest followed by Washington or Northwest area 5%. I think this can be representative of our entire portfolio but there might be some slight changes given our significant percentage of our CRE portfolio as a percentage of the total portfolio, but we can certainly get back to you the entire loan portfolio distribution to you.

Okay, thank you. That’d be very helpful. Thanks, again.

[Operator Instructions] Our next question comes from Steve Tusa [ph] with Tenor Capital. Please go ahead.

Hi, good morning.

Good morning.

Good morning.

I had a question on the -- where the weighted average LTV and the DCR ratios are presented [ph] is there similar information, how the company was set up back in 2008 before the Great Recession? Just to get a sense of your cushion ratios were back then versus now. Just trying to get an analogy with how the portfolio may hold up vis-à-vis...

As we mentioned before, I think that 2008 timeframe, I think the legacy institutions that combined to form Bank of Hope came from many different banks probably five or six banks or so. And so I think in terms of underwriting standards back then, really difficult to compare. I will say one of the biggest or more significant factors, I think that does distinguish between the two portfolios is just the level of underwriting and customer base that we have now. I think in terms of the smaller institutions back in 2008, there were some limitation to access larger and higher quality type of customers and properties and I think that’s pretty much prevalent throughout the portfolio, including the hotel and motel space. But as we described in our prepared remarks, we have been preparing to create more buffer for this particular portfolio and since we know we have a concentration in hotel-motels, we have increased the DCR. Actually starting back in 2017, we actually increased our debt coverage ratios in preparation for any type of downturn situation and even though we increased it to 1.5, the weighted average DCR, as you can see, originated since 2019 is about 2.16 for that portfolio. So these are hotels that have been performing very well. We have - very common to see hotels in our portfolio that are three times DCRs, they are generally well located with strong sponsor support and we have - majority of these have personal guarantees. And so I think our portfolio as we stand now, without directly comparing the actual underwriting metrics used in 2008, I would say that we are much better positioned here.

Okay. And if possible, I know someone had already asked for, but if you could make it more widely available that same type of information on Slide 8, going back to the entire portfolio, so pre-anything originated in 2019, I think a lot of people would find it helpful. Thank you.

Sure. Thank you.

This concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Thank you. Once again, thank you everyone for joining us today. We hope all of you stay safe and healthy, and we look forward to speaking with you again next quarter.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.